9.12 Disability Support Pension

Background

The Disability Support Pension (DSP) is a payment for those aged between 16 and Age Pension age with reduced participation capacity due to a physical, intellectual, or psychiatric condition. DSP payment rates, indexation methodology and means testing arrangements are the same as the Age Pension.

The number of DSP recipients and DSP expenditure has grown substantially over the last 20 years. Expenditure is projected to increase, but at a slower rate than previously, in real terms over the forward estimates.

The DSP is an important part of the income support system for people whose disability means they are unable to undertake substantive work. It is the second largest income support payment in terms of expenditure.

Rationale for government intervention

The DSP is designed to support people who have a disability and are genuinely unable to fully support themselves through paid work. It is important that the government protect the truly disadvantaged and target assistance to those most in need. The payment has regard to community standards through indexation of the rate to wage movements, meaning recipients share in productivity improvements and rising living standards of the rest of the population.

Current structure of the programme

Eligibility

To qualify for DSP a person must be 16 years or over and be under Age Pension age at the time of claim (Australian Government, 2013) and:

be permanently blind; or

have a physical, intellectual or psychiatric impairment (assessed at 20 points or more under the Impairment Tables);

be unable to do any work of at least 15 hours a week, or be re-skilled for any work, for a period of at least two years; and

have become unable to work while in Australia, or have 10 years qualifying Australian residence.

Payment rate

The DSP currently pays a maximum rate of $827.10 per fortnight (around $21,500 per year) for singles and $1,246.80 (around $32,500 per year) for couples combined. For singles, $751.70 of this payment represents the maximum base rate and the remaining $75.40 is paid through various supplements. Recipients may also be eligible for Rent Assistance if they rent privately (Australian Government, 2014).

Indexation

The DSP maximum base rate is indexed every six months to the higher of growth in the Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index (PBLCI). The PBLCI is similar to the CPI but adjusted for the basket of goods typically purchased by people on pensions or allowances. The maximum base rate is also ‘benchmarked’ to Male Total Average Weekly Earnings (MTAWE) (27.7 per cent for the single rate) which effectively drives the indexation of the payment. The rate of supplements is indexed to CPI only.

Means test

The same means test as the Age Pension is applied to the DSP. An income test assesses income from employment, business income and income from assets, reducing a person’s payment by 50 cents for every dollar above the income test free area (currently $4,056 per year for singles and $7,176 per year for couples combined).

Under the income test, a pensioner’s financial assets – such as shares and term deposits –are deemed to earn a certain rate of return, with the current deeming rate being up to 3.5 per cent. Some asset classes – including superannuation and investment properties – are assessed under the income test using alternative arrangements.

An assets test also applies and reduces a person’s entitlement by $1.50 per fortnight for every $1,000 in assets above the assets test free area (currently $196,750 for singles and $279,000 for couples who are homeowners). Higher assets test free areas apply for pensioners who are not homeowners ($339,250 for singles and $421,500 for couples).

The rate of pension that applies is the lower rate from either the income test or the assets test.

Trends

The numbers of people receiving the DSP have grown substantially over the last 20 years. Chart 9.12.1 shows DSP expenditure is currently $15.8 billion and is projected to increase at 1.5 per cent in real terms over the forward estimates.

Due partly to the correlation between disability rates and age, DSP expenditure is expected to increase as a proportion of GDP from around 0.9 per cent currently to 1 per cent by 2050.

New applicants to the DSP have their level of disability assessed using impairment tables. It is important that the initial assessment of impairment is correct, as once a person starts to receive the DSP they are unlikely to exit (Australian Government, 2013). Those who do exit typically go onto another income support payment.

The impairment tables used for assessing the level of disability of DSP applicants were revised in 2012. The new tables are a more appropriate way of assessing disability. They are consistent with contemporary medical and rehabilitation practice. Importantly, they have a focus on functional ability and consider what people are able to do. Application of the methodology appears to have contained growth in DSP numbers based on the early available evidence.

Chart 9.12.1: Projected spending on Disability Support Pension

Source: National Commission of Audit.

Drivers

Growth in the number of recipients is expected to drive around half the increase in future DSP expenditure.

The ageing of the population can be expected to drive increases in the number of DSP recipients as disability rates increase with age. Further drivers of the increase in the number of DSP recipients include changes to other income support payments such as:

the closing of partner-related payments, such as Wife Pension, Partner Allowance and Widow Allowance, increasing the number of females receiving the DSP;

the widening gap between the DSP and the unemployment benefit (Newstart Allowance), increasing the attractiveness of the DSP; and

increases to the Age Pension age, increasing the number of people who would have become Age Pensioners in the absence of an increase may instead go onto the DSP.

As shown in Chart 9.12.2 below, the number of DSP recipients has doubled over the last 20 years. Although early evidence suggests new eligibility criteria introduced in 2012 has slowed the growth in the number of recipients.

Chart 9.12.2: Disability Support Pension recipients

Source: National Commission of Audit, based on Department of Social Services data.

The other main driver of the increase in DSP expenditure is payment indexation. The primary driver of indexation for the DSP is Male Total Average Weekly Earnings.

Potential areas for reform

Changes to payment parameters

The payment parameters for the DSP are currently equal to those for the Age Pension. The pension class of payments represents the social living wage paid to those who are not expected to support themselves through paid employment.

Recommendations relating to changes in the Age Pension benchmark and eligibility parameters will flow through to the Disability Support Pension. In particular, transitioning the Disability Support Pension to the new benchmark of 28 per cent of Average Weekly Earnings should apply at the same time as implementation of those changes to the Age Pension benchmark.

It would be a matter for government to decide when the eligibility changes apply to Disability Support Pension recipients (recognising that for the Age Pension these eligibility requirements apply prospectively to new recipients from 2027-28). These include a more comprehensive means test; and an increase in the income test taper rate from 50 per cent to 75 per cent. The Commission notes, however, that only a small number of recipients of the Disability Support Pension (less than 10 per cent) would likely be affected by changes to the means test.

Reassessing grandfathered cohorts

In addition, new participation requirements were introduced in 2012 for DSP recipients under age 35 assessed as having a partial capacity work to attend regular participation interviews and to develop participation plans. Interviews are scheduled at least every six months and are to identify suitable activities for the DSP recipient that take into account their individual circumstances and barriers to participation. It would be equitable to extend these requirements to relevant grandfathered cohorts.

As only new entrants are assessed under the newer methodology there have been inequalities created between recent DSP entrants and the existing stock of DSP recipients (grandfathered recipients). This inequality should be addressed by applying the new methodology to grandfathered recipients.

Applying the new assessment methodology and participation requirements to the entire stock of DSP recipients would be expensive and ineffective for some groups. Instead, a risk management approach should be taken where application of the new criteria is applied to cohorts of grandfathered recipients who have the greatest potential for work. Examples could include younger people under the age of 35 and recipients who currently earn some employment income.